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Long term trend of the UK market

If one looks at a long-term chart of the UK stock market, the line starts in the bottom left-hand corner and ends in the top right-ish corner of the chart. In other words, the trend over the decades has been up (albeit with a fair degree of volatility along the way).

Can this trend be analysed to give any clue to the future movement of the stock market?

1920 – 2013

The chart below plots the FTSE All Share Index from 1920 to the present day.

Notes:

The Y-scale is logarithmic (more suitable for long-term charts).

The straight line is a line of best fit calculated by regression analysis.

Observations:

The R2 for the line of best fit is 0.92, which is fairly high (i.e. the line of best fit fairly accurately approximates the real data points).

The FTSE All Share Index traded below the long-term trend line (line of best fit) from 1938 to 1984, and then traded above the trend line until 2008 (having only just stayed above it in 2003).

The equation of the line of best fit can be used to make forecasts for the FTSE All Share Index. (Although, with the assumption that the FTSE All Share and FTSE 100 indices are closely correlated, the forecast will be made for the FTSE 100 as that is the more closely followed index.)

The following table shows some forecast levels for the FTSE 100 Index as calculated by the trend line in the above chart.

Date

FTSE 100 Forecast

Chng from today(%)

Apr 2013

5,916

-8%

Dec 2018

8,374

30%

Dec 2023

11,367

77%

Dec 2033

20,949

226%

Dec 2063

131,087

1938%

At the time of writing the FTSE 100 Index is 6431, but the trend line forecasts a level for today of 5916 (i.e. the index would have to fall 8% to match the calculated trend value).

The trend line forecasts a FTSE 100 level of 8374 in December 2018 (an increase of 30% over its current level).

1946 – 2013

We will now look at a trend line calculated from data 1946 to 2013.

In this case the R2 is 0.96 – even better than the first chart. And a visual inspection confirms that the actual index tracks the line of best fit closer than in the previous chart.

The main difference is that this second trend line suggests the current level of the market is significantly below the long-term trend.

Again, the following table shows some forecast levels of the FTSE 100 Index as calculated by the trend line in the above chart.

Date

FTSE 100 Forecast

Chng from today(%)

Apr 2013

9,245

44%

Dec 2018

14,362

123%

Dec 2023

21,159

229%

Dec 2033

45,932

614%

Dec 2063

469,691

7,203%

In this case, the trend line from 1946 calculates a current level of the FTSE 100 Index of 9,245 (44% above the current actual level).

The trend line forecasts a FTSE 100 level of 14,362 in December 2018 (an increase of 123% over its current level).

Summary

Even if one does believe that the long-term-trend for the stock market will continue, the choice of start date for the long-term trend significantly affects the values forecast by the trend line.